Giving gold mutual funds another go

NEW YORK - Gold is back on the rise after dropping like lead last year. Although it has recovered just a portion of its steep loss from 2013, the shift in momentum has been enough to halt the stampede of investors from gold-related funds.

The price of gold has jumped 14 percent this year, towering over the nearly flat performance of the Standard & Poor's 500 index. The stocks of gold-mining companies have been even better. The FTSE Gold Mines index of miners around the world has jumped 25 percent. It's a welcome change for anyone who stuck with the precious metal throughout 2013, when its price sank 28 percent. It was the first down year for gold in more than a decade and its biggest loss since 1981.

To be sure, many analysts don't expect gold's mini-rebound to last. Barclays Capital, for example, projects gold will average $1,260 an ounce in the last three months of this year. That would be an 8 percent drop from the current price of roughly $1,370 per ounce. Many of the conditions that led to last year's decline are still in place: Inflation remains low, the Federal Reserve is slowing its bond-buying stimulus program and the economy is making some progress, even if it's less than hoped.

Investors are nevertheless giving gold-related funds another chance, albeit tentatively. The SPDR Gold Shares exchange-traded fund (GLD), one of the most popular ways to buy gold, now holds 26.1 million ounces for investors. That's up from 25.7 million ounces at the end of 2013. Although that may not sound like a big change, it's a sharp turnaround from last year. Over the course of 2013, the fund's gold assets fell by 41 percent from 43.4 million ounces.

Some managers of gold-related funds say shares of miners look to be a better choice than the metal itself. Mining stocks often swing more sharply than the price of gold - climbing faster in a rising market and falling more sharply during downturns - and miners were hit particularly hard last year. That leaves them more attractive than gold, managers say.

The First Eagle Gold fund (SGGDX), rated five-stars by Morningstar, can buy either gold or the companies that pull it from the ground. The fund makes its choice based on whichever looks cheaper, and it has a big preference for miners: It has nearly 80 percent of its assets invested in gold mining stocks versus 18 percent in gold bullion.

"If you're willing to buy gold in a vault, you should be willing to own it in the dirt," says Matt McLennan, portfolio manager of the fund. "It's been ugly, but there has been an opportunity to invest in the miners."

Another benefit is that gold-mining stocks often pay dividends, says Michael Bradshaw, senior portfolio manager at the Wells Fargo Advantage Precious Metals fund (EKWAK). Each of the fund's five biggest stock investments pays a dividend. The FTSE Gold Mines index had a 1.7 percent dividend yield at the end of February, while gold yields nothing.

Investors are buying in, and mutual funds that own gold-mining stocks have attracted $358 million in net investment through February of this year, according to Morningstar. It's a sharp turnaround from 2013, when investors pulled an average of $355 million from the group every two months.

Many of the companies in gold-related stock funds are based outside the U.S., in countries such as Australia and South Africa. That raises concerns because changes in currency values can wipe out gains made by their stocks. But currencies from gold-producing countries often move in concert with gold's price, limiting the risk, managers say.

A bigger concern is the politics of mining abroad. Companies can run into troubles with labor groups or local governments.

Another risk is that gold's price falls like it did in 2013. Gold's descent accelerated last spring amid speculation that the Federal Reserve would pare back its $85 billion in monthly bond purchases. A wind-down of the stimulus program means less demand from investors who had been worried that the Fed's efforts would lead to higher inflation. Gold has traditionally been seen as an investment whose price will rise with inflation.

The Fed has since begun to trim its monthly bond purchases, and inflation was relatively low at 1.6 percent in January.

This year's climb for gold has been due to the return of a familiar reason: fear. Investors often buy gold when they're worried, and several weaker-than-expected reports on the economy heightened concerns. Tensions in Ukraine also drove increased interest in gold.

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